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Should you still invest in FMPs?

Many fund houses are busy merging their FMPs or fixed maturity plans with open-ended debt schemes. The big question is: are FMPs still an investment option for retail mutual fund investors?

Fixed maturity plans or FMPs have lost their charm in the last few years. After the defaults hit them in 2018, the schemes have been under pressure. In 2019, Kotak AMC was under fire when Essel Group default hit their six FMPs. Not only Kotak, big fund houses like HDFC MF, Aditya Birla Sun Life MF and Reliance MF came under the scanner.

In the last one year, FMPs have offered an average return of 2.96%. In three years, the category has given 4.16% and 5.24% returns in 5 years. According to value research data, currently, there are only three fund houses with active FMPs in the market. Recently, Aditya Birla Sun Life Mutual Fund rolled over seven of its FMPs. Kotak Mutual Fund also decided to merge FMP Series 246 into its corporate bond fund.

For latecomers, a fixed maturity plan is a close-ended debt fund that has a fixed lock-in period and a limited investment window. Such corpus mainly consists of debt securities such as certificates of deposit, treasury bills, corporate bonds, etc.

The fixed lock-in period is put in place to maximise returns in the schemes. The three and more years of lock-in also gives the benefit of long-term capital gains. The taxation and locking of interest rates are the USP of these schemes.

“FMPs are ideal for both retail and institutional investors as they provide exposure across a diversified basket of bonds. FMPs have limited liquidity in the secondary market hence investors must be sure of their cash flow requirements. Investors should choose the FMPs based on the guidance on the portfolio quality provided by the AMC and match it with their own risk appetite. If the investment horizon is for 3 years or more, then FMPs are an ideal tax-efficient investment option,” says Anand Nevatia, Fund Manager, TRUST Mutual Fund.

FMPs generally don’t carry interest rate risk and hence these products are recommended in times of interest rate volatility. However, these schemes are prone to credit defaults. In case of a credit risk event, investors can be in a fix in these schemes. Hence financial planners believe that target maturity plans are a better alternative for FMPs. This means you can have a longer-term fixed debt scheme with better liquidity.

“One drawback of FMPs is the lack of liquidity. Even though these are listed at the exchange as a matter of rule, there is no action at the exchange, effectively making these illiquid. As against these, Target Maturity Funds behave in a similar manner as FMPs but have liquidity. It is not a good idea to lock in your money in FMPs, more so at this juncture when interest rates are on the lower side. At most one may consider purchasing units of FMPs issued and listed earlier, with residual maturity less than the initial maturity if there is a seller at a discounted price at the Exchange,” says Joydeep Sen, author and corporate trainer.

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